AAFP, Other Groups Protest Proposed Tax Law Change That Could Drive Up Health Care Costs

The AAFP and dozens of other organizations have urged the U.S. Department of the Treasury to not provide a special tax deduction for trial attorneys who enter into gross contingency fee contracts with their clients, contending that such a deduction could entice some trial lawyers to file spurious lawsuits against physicians and further boost the cost of health care.

"Numerous news articles have recently reported that the Treasury Department may reverse its longstanding tax policy maintaining that court and other litigation expenses advanced by trial attorneys are not deductible as business expenses," says a Sept. 1 letter from the AAFP, the AMA and 90 other organizations to Treasury Secretary Timothy Geithner. "Such a change is estimated to cost taxpayers over $1.5 billion and could act as a financial incentive for trial attorneys to file less meritorious lawsuits against physicians and other health care providers."

In the letter, the AAFP and the other organizations point out that "even though a substantial majority of claims are dropped or decided in favor of physicians, the cost of defending against meritless claims averages over $22,000."

"This leads to increased costs for physicians and patients -- money that could otherwise be spent expanding coverage to the uninsured."

According to the letter, President Obama, as well as House and Senate members from both parties, have publicly recognized that the medical liability system is in need of reform to reduce meritless lawsuits. Moreover, the Congressional Budget Office has estimated that effective medical liability reforms would decrease costs associated with physicians practicing so-called defensive medicine and save the government $54 billion in a 10-year period.

Therefore, the letter notes, "we find it perplexing that the Treasury Department would consider a change in policy that could add to the cost of health care, especially at a time when the nation is engaged in implementing comprehensive health system reform and expanding coverage to the uninsured."

"We would object in the strongest possible terms to any change in federal tax policy that could increase meritless claims and add unnecessary costs to our health care system."

The letter points out that the Treasury Department is basing its consideration on a 1995 Ninth Circuit Court of Appeals case, Boccardo v. Commissioner of Internal Revenue(caselaw.findlaw.com), in which the court overturned a ruling of the U.S. Tax Court and longstanding tax policy by finding that attorneys are not extending loans to clients under gross fee contracts and may, therefore, treat litigation costs as deductible expenses in the year in which they occur.

"This ruling, however, has not been validated by other circuit courts," the letter says. "Also, the Internal Revenue Service issued guidance in 1997 maintaining the position that litigation expenses advanced by trial lawyers are not deductible regardless of whether a trial attorney uses a gross fee or a net contract with clients."

In addition, says the letter, legislation introduced in the House and Senate to provide trial attorneys with a statutory tax deduction for litigation costs in contingency fee cases has failed to attract enough support to hold hearings on the issue.

"Considering these dynamics, we believe that any change in tax policy would be unjustified without a full and public examination of the ramifications," says the letter.